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January 21, 2019

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Choosing a Business Form

Whether you're already publishing material on your website or justgetting started, the question of what business structure to operateunder is an important one. Depending on whether you work alone or inconjunction with other content creators, you may face hard questions about ownership of assets, management structure, payment of taxes, splitting up of profits (if any), transfer of ownership, and dissolution of your working relationship. Additionally, as we address in detail in other parts of this guide, publishing material online exposes you to the risk of liability for defamation, invasion of privacy, copyright infringement, and other legal claims. What kind ofbusiness structure you choose to adopt can have a significant impact on these and other issues.

Before proceeding, a word or two of caution are in order.There is no magic business structure that will make all legal risks and problems go away. Each person or group of people must make the choice based on their goals and personal preferences. What's more, there is agreat deal of uncertainty about how old-school business law applies tothe online publishing context, so the guidance found here should be taken with a grain of salt.

So what are your options?

Sole Proprietor: You can carry on your online publishing activities, alone or in conjunction with employees, as a "sole proprietor." This form is only appropriate if you contemplate being the only owner of the business. There are some adverse liability consequences of this choice (which we'll discuss), but this form gives you direct control over management of your business and its assets, generally involves less up-front, out-of-pocket cost and hassle than the limited liability entities below, and is generally easier from a tax filing perspective because no separate income tax return is required.

Informal Group: You can carry on your online publishing activities in conjunction with others without a formal agreement or entity structure governing the terms of your relationship. In this case, your legal status is uncertain, and a court might view you and your collaborators as partners, as employers and employees, or as independent contractors. This may feel like the natural form for collaborators to adopt, and it is low on hassle and up-front, out-of-pocket costs, but it has potentially serious negative consequences in terms of liability and tax implications and can lead to major complications in managing and/or dissolving the enterprise. Under this section, we will discuss the usefulness of so-called "co-publishing" or "co-blogging" agreements as a mechanism for bringing some clarity to your group endeavor.

Partnership: You can carry on your online publishing activities in conjunction with others under the auspices of a formal partnership agreement. This choice generally only makes sense if you are carrying on your business for profit. There are some adverse liability consequences of this choice (which we'll discuss), but this form lets you order your group affairs contractually and generally involves less up-front, out-of-pocket cost and hassle than the limited liability entities below. In addition, this form can be advantageous for tax reasons because it allows for pass-through tax treatment (that is, there is generally no entity-level taxation).

Limited Liability Company: You can carry on your online publishing activities, alone or in conjunction with others, as a limited liability company. Limited liability companies (LLCs) offer limited liability for the debts and obligations of the company, with somewhat fewer operating formalities than corporations. LLCs are also advantageous because they combine the potential tax benefits of a partnership with the limited liability of a corporation. That said, they generally involve more up-front, out-of-pocket cost and hassle than getting started as and running a sole proprietorship, informal group, or partnership.

Low-Profit Limited Liability Company: In some states, you can carry on your online publishing activities as a low-profit limited liability company (L3C). Like the LLC, the L3C offers limited liability for the debts and obligations of the company, with somewhat fewer operating formalities than corporations. L3Cs are designed to take advantage of Program Related Investments (PRI) by private foundations.

Cooperative Corporation: If you are interested in creating a community-focused news business, particularly in an area underserved by other journalism outlets, you might consider forming a "cooperative corporation." Many states allow the formation of cooperatives, which are designed to place the ownership and/or control of a business in the hands of the employees or patrons of the business. Cooperatives follow special rules that ensure that all community owners of the cooperative have an equal say in how the business is run. Like standard corporations, this form of business has the benefit of limited liability, and can involve costly and burdensome filing and record-keeping requirements and observation of "corporate formalities." However, a cooperative can avoid some of the "double taxation" issues that affect normal corporations by issuing special "patronage dividends" - i.e., distribution of the profits of a cooperative in the form of a refund to patrons who have purchased goods or services from the cooperative. Some states also allow the formation of non-profit cooperatives, which combine the cooperative concept of equal voting rights with the features of a non-profit corporation (including potentially tax exempt status).

Corporation: You can carry on your online publishing activities, alone or in conjunction with others, as a corporation. Most big, publicly traded companies that are "household names" are corporations. This form of business has the benefit of limited liability, but forming and operating a corporation involves costly and burdensome filing and record-keeping requirements and observation of "corporate formalities." Forming a corporation can also have potentially adverse tax consequences because the corporation is taxed on its income at the entity level and the shareholders are also taxed on any dividends that are distributed (see the page on "double taxation" for more information) in the case of a corporation classified under subchapter C of the Internal Revenue Code (a "C Corporation").

Nonprofit Organization: You can carry on your online publishing activities in conjunction with others as a nonprofit corporation. Those who operate a nonprofit corporation enjoy limited liability for the debts and obligations of the organization, and the organization is not subject to income tax on the federal and (usually) the state level. There are important restrictions involved in operating a nonprofit, however, including limits on the purposes of the organization's activities, a ban on personal benefit from those activities, and restrictions on political and lobbying activities, and the process of filing for tax-exempt status can be time consuming in contrast to the obligations imposed on other business forms discussed above. Also, keep in mind that a nonprofit has no owner(s) in the ordinary sense, and therefore creating one involves relinquishing control. In addition, nonprofits have strict dissolution requirements, they cannot pay dividends, and employees can only receive reasonable salaries. Nevertheless, this may be a good option for members of a collaborative venture that does not aim at making a profit, who want increased legal certainty about their status, and to enjoy limited liability and tax benefits.

Keep in mind that operating as a business (as opposed to as anindividual or as part of an informal group) may provide certain legal and non-legal benefits. For example, operating as a business can give your enterprise an air of legitimacy, which may influence the reception of your work or make it easier for you to raise capital or obtain grants (some granting organizations only give money to qualified 501(c)(3) nonprofit organizations). It may also help you get press credentials.

Importantly, you may have a better argument for inclusion under some state shield laws if you are affiliated with a business, and you may have a better chance of invoking the reporter's privilege to avoid having to testify in a legal proceeding regarding your sources and/or information gathered in the course of your news gathering activities. You can refer to the State Shield Laws page for more information, and we will be dealing with the reporter's privilege in forthcoming sections of this guide.

We are looking for contributing authors with expertise in media law, intellectual property, First Amendment, and other related fields to join us as guest bloggers. If you are interested, please contact us for more details.

Disclaimer

Information in this guide is based on general principles of law and is intended for information purposes only; we make no claim as to the comprehensiveness or accuracy of the information. It is not offered for the purpose of providing individualized legal advice. Use of this guide does not create an attorney-client or any other relationship between the user and the Digital Media Law Project or the Berkman Center for Internet & Society.

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